Bleak outlook for commercial real estate

Clinging to its reputation for being insulated from what’s going on anywhere else, the deepening recession is beginning to affect Long Island’s commercial real estate market.

Tightened credit and weakened demand have already killed some new development projects, while others are stalled.

Experts have warned that 2009 will bring the worst of it, as the real estate industry faces unprecedented challenges in the coming year.

While lengthy permitting makes it hard enough to get new projects built here, the current economic climate makes it even tougher, according to Bob Coughlan of Tritec Development in East Setauket. And he doesn’t think things will improve anytime soon.

“It’s not a pretty picture,” Coughlan said.

The Tritec principal said financial markets are frozen for both private and institutional lending. With construction costs at an all time high, Coughlan said it will be cheaper to buy existing buildings than build them in 2009.

Despite the hurdles, Coughlan said Tritec should break ground on its $100 million mixed-use redevelopment in downtown Patchogue sometime next year.

Many crystal balls are coming up cloudy for 2009, and that might be one of the problems,
according to RexCorp chief Scott Rechler. He said the local effect of the federal
government’s economic stimulus plan can’t be predicted because the plan itself has yet to take shape.

“There’s so much uncertainty that it’s very hard to assess what the future holds,” Rechler said.

The RexCorp chief said 2009 will be a challenging year because continuing turmoil in the financial industry will increase unemployment and decrease the demand for real estate.

Wilbur Breslin, head of Breslin Realty, is predicting “another six to 12 months of doom and gloom” for the Island’s real estate industry.

But Breslin said the coming year will also present all kinds of opportunities to acquire properties at lower prices. He said the correction in property values was necessary, because amateur investors had overpaid for commercial property in recent years and bid up the prices.

“Now they’re going to pay the penalty,” Breslin said. He predicted that there will be “a lot of bankruptcies” after the first of the year.

As for the availability of financing, Breslin said those that are “entrenched” can still get money. He said during the last recession in 1990 “you couldn’t get anything.”

Blumenfeld Development Group chief Ed Blumenfeld said a lot of what happens in 2009 will depend on what the government can accomplish with its jumpstart measures.

He said the downturn will be a chance for public officials to “correct the ills” of the tedious approvals process.

Blumenfeld will start the New Year down two employees who have relocated to North Carolina because they couldn’t afford to live here.

The BDG chief said financing for real estate will be available, at a price. He said banks are receiving cheap money from the government but they’re raising the rates they charge to borrowers.

BDG continues to rent spots in Tanger’s newly opened the Arches outlet center in Deer Park, the 800,000-square-foot open air shopping plaza. Leasing activity has slowed there, but Blumenfeld said that’s because it’s the middle of the holiday season. He doesn’t blame the economy.

Breslin said all the talk about the recession is one of the problems. As a result, he said, people may stop spending money.

“It’s going to be a tough year, but in real estate there is a cycle,” Breslin said. “It doesn’t stop, but it might slow down.”

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